Derek Lidow: The “Valuation Sensation” Distortion

Oct 21, 2014 12:54 pm ET

Derek Lidow, entrepreneurship professor at Princeton University: In the U.S. about 5 million people every year attempt to become entrepreneurs. Typically, most funding for startups comes from the founder’s savings, followed by loans on assets such as cars and houses, followed by credit card debt. According to the Kauffman Foundation, less than 10% of all the funds invested in startups comes from outsider equity, and about 40% of that amount comes from friends and informal investors other than immediate family. Surprisingly, only a very small percentage of the money that goes into starting new businesses in the U.S. comes from either angels or VCs. “Valuation sensations” – young entrepreneurs who are worth more than a billion dollars – distort our understanding of how entrepreneurship works in America and how and when it makes sense to get outside funding for a startup from strangers who want to be partners. …